Human behaviour has a tendency to incur more expenditures when the funds are readily available. Sometimes, the savings concept also goes for a toss. Imagine a situation, where a person earns income throughout the year and spends it on various things. Here, taxes often get ignored and when there comes time to file returns and pay taxes there are no funds left. To avoid such kind of situation, Advance tax comes to the rescue where taxes are paid in instalments.
What is Advance Tax?
As the name suggests, Advance tax means payment of tax in advance. It is a system of paying income tax in instalments throughout the year rather than in one lump sum at the end of the financial year while filing an ITR. Additionally, it is also called “Pay As You Earn” tax since proportionate payment of your total tax liability is to be done quarterly during the financial year. It also ensures a regular flow of funds to the government accounts to meet the working capital requirements.
Who is liable to Pay Advance Tax?
Every person whose tax liability for a financial year is INR 10,000 or more has to pay this tax on an instalment basis. To calculate the tax liability, the taxpayer has to consider income from all heads. However, if any TDS is deducted or TCS is collected, such amount shall be considered while calculating the tax liability.
A resident individual of age 60 years or more, not having any taxable income under Business and Profession is not liable to pay advance tax.
Tax on different Income Heads
Income is taxable as per the special rates or slab rates as per the IT rule. Accordingly, tax is calculated.
For individuals having income from salary, the employer is responsible for calculating the tax, deducting TDS from the employee’s salary, and depositing the same to the Government. Hence, a salaried person does not have a liability to pay this tax.
However, if a salaried person has income other than salary (for eg. rental income from house property or interest from fixed deposits etc.), and if tax liability on such income is equal to or exceeds INR 10,000 then they are liable to pay this tax on such other incomes.
For example, let’s suppose an employee has some interest income and the tax on such income exceeds INR 10,000. Here, the employee needs to pay tax in advance on such interest income.
An individual is liable to pay advance tax on rental income if the tax liability from rent income is equal to or exceeds INR 10,000. TDS deducted by the tenant has to be adjusted against tax liability.
Nowadays, a lot of people invest in the stock market and have capital gains. And, indeed, it is difficult to estimate the earnings in advance in the stock market. Therefore, it is a common query, if they need to pay advance tax or not. On capital gains tax, income is calculated on a receipt basis and similarly, advance tax liability arises only when such income is received unlike on an estimation basis.
For e.g., if Tarun has received a CG income that falls under advance tax liability on 20th June 2022, he needs to pay the tax for a consecutive quarter. i.e., 15th September 2022.
Business & Profession
Businesses and professionals have to calculate and pay tax on an instalment basis. In most cases, TDS deducted by their customers/clients does not cover the total tax liability.
However, there is an exception for taxpayers opting for a presumptive taxation scheme as they will be required to pay their entire advance tax liability in one instalment on or before 15th March.
Income From Other Source
Tax liability has to be calculated for other source income like interest income, dividend income, gift income, etc. If the tax liability exceeds INR 10,000 then taxes have to be paid in advance. Taxpayers falling under the 30% slab will have to consider advance tax as TDS deducted on such incomes will not be sufficient to cover the liability.
Taxpayers were facing difficulty in estimating dividend income accurately. Hence, as per the union budget 2021, the liability of tax will arise on declared dividends or paid dividends only.
How to Calculate Advance Tax
- Estimate your income
Estimate the total taxable income from all the sources.
- Subtract eligible deductions under Section 80.
- Calculate the tax liability
Now calculate the tax liability at applicable rates and reduce the taxes paid such as previously paid tax, TDS deducted from the income or TCS collected.
- Assess the net tax liability
After deducting the taxes already paid, if the resulting tax liability is equal to or more than INR 10,000 then the taxpayer is liable to pay advance tax on an installment basis as per the schedule given below.
Advance Tax Due Dates
Tax is paid on the following dates of a financial year.
|On or Before||In the case of Individual and Corporate Taxpayers other than taxpayers opting for presumptive income u/s 44AD||Taxpayers opting for presumptive income u/s 44AD|
|15th June||15% of net tax payable||NIL|
|15th September||45% of net tax payable||NIL|
|15th December||75% of net tax payable||NIL|
|15th March||100% of net tax payable||100% of net tax payable|
According to Section 234C of the Income Tax Act, any shortfall or failure in payment of advance tax attracts a penal interest of 1% per month until the total tax liability is paid. However, if tax liability of up to 12% in the first quarter, 36% in the second quarter and 90% in the last is paid then no interest will be levied.
Let’s understand through an example
Mr Akash has estimated his taxable income for the current year to be INR 20,00,000. He is not eligible to claim any income deductions. According to the rule, he is liable to pay a tax of INR 4,29,000 as per the old regime slab rate.
Let’s calculate Akash’s advance tax:
|Due Date||Advance tax||Tax Payable|
|15th June||INR 64,350 (15%)||INR 64,350|
|15th September||INR 1,93,050 (45%)||INR 1,28,700 (1,93,050- 64,350)|
|15th December||INR 3,21,750 (75%)||INR 1,28,700 (3,21,750- 1,93,050)|
|15th March||INR 4,29,000 (100%)||INR 1,07,250 (4,29,000- 1,07,250)|
Yes, tax is calculated on the basis of estimated income. If there are any changes in the estimated income, advance tax liability will change accordingly, for which adjustment can be made in the next quarter payment.
Before every due date for payment of advance tax, the taxpayer will have to calculate expected annual income and determine the tax liability. If the total tax liability equals or exceeds INR 10,000 then tax payments have to be made.
There are two ways of tax payment:
– Online payment using Net banking, credit card, UPI, debit card, etc or
– Deposit in the bank with advance tax challan offline
As mentioned above, if the tax payment due date is missed, interest at 1% per month or part thereof will be levied. However, any tax paid on or before 31st March will be considered as advance tax.
At the time of filing the Income tax return, the tax paid will be adjusted against the tax liability and the excess can be claimed as a refund.